TO KNOW AND LEARN

ABOUT
BUDGETING

• Conducted By
• Nadeem Yusuf Mufti
YOUR PARTICIPATION IS THE
KEY ELEMENT
 Budgeting

• 1. Definition
• 2. Certain Questions in minds regarding Budgeting
• 3. Objectives and Purposes of Budgeting
• 4. Fundamental Purposes of Budgeting
• 5. Budgeting and Planning
• 6. Four Aspects of the Control Process
• 7. Preliminary Checklist
• 8. The Capital Budget
• 9. Classification
• 10.Categories
• 11. Capital Budgeting- A Long-Range Planning
• 12. Evaluating Capital Investments
• 13. Required Returns
• 14. Capital Project Analysis Techniques for its
Feasibility
• 15. Zero Base Budgeting
 Definition

• Budget is the statement of operational intents of the

business. Budgeting is the preparation of a detailed
operating plan, which will meet or improve upon the
profit objective, by providing control.
 Certain Questions in minds regarding
Budgeting

• What It Is and How To Do It?

• What Business are we In?
• What Assets do we Have?
• Where are we going and where do we want to be –
what are our Objectives?
Objectives and Purposes of Budgeting

• In all objectives, we finally arrive at a profit objective

stated in money terms. How to achieve profit
objective?
• Answer to this very important Question is that, we
need to have plans.
 Fundamental Purposes of Budgeting

• The fundamental purpose of budgeting is to assist

management to carry out its basic functions of
Planning, Coordinating and Controlling operations,
effectively.
• It is very important that Management, from the top
down, must participate in the establishment of goals,
and in making plans, in harmony with other
Departments. Adequate historical accounting data is
required to put down in figures what is necessary for
satisfactory results and Plans for the most economical
use of recourses.
 Budgeting and Planning
• There must be a formal Management structure to
support a responsibility accounting budget. A
responsibility accounting process means that each
executive is accountable for achieving the budget, as
part of the overall corporate development plan. The
responsibility budget needs a budgetary planning and
control system. To do their jobs effectively, people
needs facts. Supplying the facts for control is an
important budgeting function.
 Four Aspects of the control process

• to Develop Plans to achieve Objectives

• to Communicate Information about proposed Plans
• to Motivate People to Accomplish the Plans
• to Report Performance
 Preliminary Checklist
• Review present financial statements, organization
charts and the charts of accounts.
• The financial statements will provide comparative
information on which to base projections of revenues
and expenditures.
• Check that the chart of accounts is adequate for the
analysis of expenditure needed.
• Look at the organization chart critically. Does it
represent the current responsibility and reporting
structure accurately? Are any adjustments needed to
reflect changes in the organizations?
• Determine what management reports will be needed.
• Based on the organization chart, what budget control
information (reports) are needed, including the
amount of details and the distribution to each level of
management responsibility.
• Appointment of the budget controller
• Set up of Budget administration Team
• Establish assumptions and guidelines
• Establish time table
• Draw up budgeting formats
• Training session for budget preparations.
 The Capital Budget
• Classified under following headings:

3. new assets acquisition

4. cost reduction and replacement
5. expansion of existing product lines
6. new products
7. health and safety
8. legal requirement
9. others
 Categories:
• Land
• Building and Civil Works
• Plant and Machinery
• Equipment
• Motor Vehicles
• Furniture and Fixtures
• IT Equipment
• Software’s
 Follow –ups
• Follow –ups on capital expenditures includes checks
on the spending itself and comparison of how near the
estimates of the cost and returns were to actual. If
there are wide variances, then a revised capital
budget may be necessary to provide additional
resource appropriation.
 Capital Budgeting- A Long-Range
Planning
• The component parts of Capital Budgets are:

• A creative search for investment opportunities.

• Long-range plans and projections for the
company’s future development.
• A correct yardstick of economic growth.
• Investment analyses of facilities that are candidate
for disposal
• Forms and procedure to ensure smooth working of
the system.
 Evaluating capital investments
• The basic objective of any investment is that in return
for paying out a given amount of cash today, a larger
amount will be received back over a period of time.
This larger amount should not only repay the original
outlay, but also provide a minimum annual rate of
return on the outlay. To obtain a true picture of the
investment, all cash outlays and inflows must be taken
into account.
• Having calculated the rate of return for a project, it
must then be decided whether the project is
financially acceptable or not.
• There are three factors to be considered:
• Cost of Capital: The minimum acceptable return
from any project is the rate of interest which the
company is paying for the capital invested in the
firm. i.e., the cost of capital.
• Opportunity cost: All projects must compete with
the return that the company could earn by investing
its available finance outside the business. The risk
and uncertainty attached to outside investments
must also be taken into account.
• Alternatives projects: Where the company is in a
capital-rationing situation, alternatives projects will
have to be ranked. These will compete with each
other for the limited supply of finance available.
 Capital Project Analysis Techniques
for its Feasibility
• Paybacks: The payback method calculates the
length of time taken by the projects net cash inflows
to equal the initial investment. If the payback period
is less than that demanded for this type of project,
then the project is acceptable.
• Accounting Rate of Return (ARR): In this method,
the accounting rate of return of a project is
calculated as a net profit percentage on capital
employed after charging depreciation. The
accounting rate of return can be determined for
each year of the project, but is usually calculated as
an average over the life of the project.
 Zero Base Budgeting
• What is Zero Base Budgeting?

• ZBB is:
• A management process.
• A process which recognizes budgeting as a
key decision making process
• An analysis and decision making process-
which results in a budget.
• ZBB is not:

3. Conceptually new
4. A budgeting process
5. Reinventing the wheel